Is The Arms Industry Eating The Pentagon’s Lunch?

Context

In early 2025, the president issued two executive orders titled “Unleashing Prosperity Through Deregulation” and “Restoring Common Sense to Federal Procurement.” They represent a generational transformation of the weapons acquisition process, gutting regulations designed to protect the government from price gouging and false claims by military contractors.

Congress bolstered these orders in the fiscal year 2026 National Defense Authorization Act (NDAA), also known as the annual defense policy bill. Lawmakers raised the threshold for military contractors to provide the Pentagon with certified cost or pricing data from $2.5 million to $10 million. These data are legally required to be accurate, complete, and current. It is for this reason that contracting officers need certified data to accurately assess whether companies are charging fair and reasonable prices on military contracts, or if they are seeking excess profits.

Lawmakers have long crafted legislative loopholes to exempt contractors from certified cost or pricing data requirements. The primary argument against them is that they create an outsized compliance burden for military contractors, particularly smaller companies with fewer resources and less experience in the military contracting realm. However, military contractors have repeatedly failed to produce evidence that cost or pricing data submission exacts undue compliance costs.

The real question

Companies should already have a firm handle on what the costs of doing business are, because they factor into a company’s profit margins. What constitutes excess profit in the military contracting realm is a separate, more interesting question than whether or how much cost and pricing transparency the government should mandate from military contractors. The administration will have to determine what it considers to be reasonable profits if it is serious about realizing the benefits of cost or pricing transparency.

In 2021, the Department of Defense Inspector General assumed that profits exceeding 15% were excessive, noting that 15% is the highest profit margin identified in the Federal Acquisition Regulation. In its audit of a sole-source spare parts supplier, TransDigm Group, Inc., the office found that the company generated $21 million in excess profits. However, the Pentagon only uncovered price-gouging by TransDigm because of congressional pressure to investigate what some members identified as a “hidden monopolist” intentionally obscuring its cost data.

Similarly, Pentagon analysts uncovered price gouging by Lockheed Martin and its subcontractor, Boeing, after a high-level Pentagon official ordered a review of their contract a decade ago. Then-Director of Defense Pricing Shay Assad was already invested in saving Pentagon dollars, and his review led to $550 million in savings when the department renegotiated the contract. Prior to the Pentagon’s review, the companies’ profits on Patriot Advanced Capability-3 missiles approached 40%.

These are just two examples of contractors overcharging the government, among many, uncovered by both inspectors general and auditors over the course of the past several decades.

The bottom line

Contracting regulations exist to ensure the department exercises leverage commensurate with its role in a monopsony market, one in which the Pentagon is the primary, if not the only, buyer for U.S. military contractors. Deputy Secretary Feinberg appears to agree, but he will need to specify what he considers reasonable profits to ensure that the Pentagon does not overpay on military contracts.

While it is only a directive, rather than a proposed statutory or regulatory change, Deputy Secretary Feinberg’s memo marks a significant shift in the administration’s thinking on acquisition policy. It is an admission that the White House and Congress’ hands-off approach to contractor accountability has failed.